Hiding Your Money in a Foreign Tax Haven is Dangerous – OVDP

Hiding Your Money in a Foreign Tax Haven is Dangerous – OVDP

Golding & Golding – U.S. and International Tax Lawyers

While you may have a legitimate reason for transferring your money to an offshore tax haven, in accordance with FATCA the IRS and U.S Government have increased enforcement of international tax compliance rules — which means you foreign transactions will be more heavily scrutinized.

This is especially true if you have placed your money in known tax havens such as Malta, Bermuda, Switzerland, or the Cayman Islands.

Sometimes individuals and businesses who thought they were operating under the radar may get caught in the wave of FATCA compliance, which opens them up to even more scrutiny.

While their intent was not to avoid reporting to the IRS or Department of Treasury (DOT), their actions were otherwise “liability avoidance based,” which thrusts them into a very difficult situation with a tough decision to make.

Avoiding a U.S. Lawsuit

In today’s society, people are too “litigation happy.” It doesn’t take much to file a lawsuit or find an unscrupulous attorney to file the suit even if the attorney knows there is no claim. In other words, the plaintiff and the attorney file the suit in order to force the hand of the deep pockets, even when there is no claim.

In order to avoid being “too liquid” in the United States and possibly having their funds attached or levied, the individual or business may move funds offshore and outside of the reach of the US court system. In other words, the purpose of moving those funds was to avoid liability following a lawsuit.

The Offshore Disclosure Catch-22

The problem is the owner of the account is now stuck in a Catch-22. In other words, was the only reason for moving the money offshore to avoid a lawsuit, or did the individual consider the tax benefits of putting the money into a foreign account to earn foreign interest income while avoiding detection.

This is a very, very important distinction that must be made by the individual before submitting to offshore disclosure.

For example:

Was the money placed into a bad bank (banks identified by the U.S. for facilitating offshore tax evasion) or not?

Did the owner of the account have other accounts overseas, and if so were they reported?

Was the money placed into a tax haven country, or rather a country which represents the applicant’s country of citizenship or where the applicant conducts other legitimate business?

Had the applicant been wrongfully sued before in the United States?

Does the applicant regularly conduct business overseas?

How did the applicant determine which bank to utilize?

Number six is probably the most important. Consider these two examples:

-Was the applicant seeking to find a way to move money offshore so it was not reported in the United States and therefore sought out banks and tax haven countries – with the added benefit of removing the money from US jurisdiction?

-Was the applicant seeking a way to avoid a lawsuit and therefore place the money offshore with the understanding (misunderstanding) that foreign accounts and/or foreign income did not have to be reported in the United States – which was simply an incorrect presumption – and thus possibly qualifying the applicant for a non-willful submission into the streamlined program (which has a significantly reduced filing requirement and penalty)

International Tax and OVDP Lawyer

If you placed your money overseas in order to avoid a US lawsuit then before making any disclosure to the Internal Revenue Service issued highly consider speaking with an international tax lawyer to evaluate the facts and circumstances of your case.

The following is a summary of the most common Frequently Asked Questions (FAQs) we receive regarding Offshore Disclosure:

OVDP (Offshore Voluntary Disclosure Program)

Golding & Golding is an International Tax Law Firm, and one of the most experienced boutique OVDP (Offshore Voluntary Disclosure Program) and International Tax Law firms in the country.

We have represented numerous businesses and individuals around the world with international tax law and OVDP submissions, with unreported assets and/or financial accounts exceeding $10,000,000.

The reason why individuals and businesses are getting in trouble with foreign reporting and OVDP is that there are so many aspects to OVDP that an inexperienced attorney, CPA or accountant would not know to look out for, and/or even warn the client about.

Over the last few years, there has been a recent increase in OVDP applications. In addition, our firm has received many referrals from clients who previously sought the help of other tax professionals who steered them in the wrong direction and nearly got them in trouble.

This is a list of the most common questions and/or mistakes made by inexperienced OVDP Attorneys that have negatively impacted our clients:

FAQ – Summary

We have put together a basic summary of key issues individuals have to worry about when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focusing more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported and how entering OVDP can impact their legal status.

Can My Immigration Status Be Impacted by OVDP?

Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.

Applying for Citizenship

Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.

Therefore, if you are a Legal Permanent Resident or other Visa holder, then there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.

Deportation or Removal

If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP Closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.

*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.

My Spouse Does not Want to Enter OVDP

It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program even if the other spouse will not comply.

It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouseas opposed to playing the wait-and-see game for two reasons:

You never know when the IRS is going to strike – and that can have a major impact on your financial status; and

You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)

We are Divorced, Not on Speaking terms and filed Tax Returns Jointly

Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts then you have every right to do so.

If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.

**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.

There is No Passive Income Tax in The Country with My Accounts

Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States does not get their chance to tax your money.

Since your worldwide income is subject to US tax, you are required to report these accounts as well as pay income tax on the earnings. Some common forms are Schedule B, 8938 andFBAR.

The Unreported Money does not belong to me?

In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.

My Business Never Reported Foreign Accounts

Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.

My Business is Held as a Foreign Holding Corporation

The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA the financial institution is going to err on the side of caution and report the account.

The Business is not Under my Name

Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards)there is an increased chance that the corporate veil will be lifted and you will be exposed.

I did not report my Foreign Retirement Account

You are required to report your foreign retirement account (some restrictions apply but with FBAR and FATCA it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.

***You should speak with an experienced over OVDP lawyer on this issue

I received a FATCA Letter, What Should I do?

If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.

If you are a US taxpayer then you will have to complete the W-9, which will make you and the bank subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.

Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty

Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in identified facilitator banks “Bad Banks.” Therefore, if you have your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).

Stated another way, just because you have money in a bad bank does not mean your entire offshore balance subject to the 50% penalty unless you were willful. That is because a person could be non-willful and still have their money in one of these bad banks – that should not make them subject two of 50% penalty.

I Sold Foreign Property and Transferred Money into a Foreign Bank Account

The money that resulted from the sale will be included in the penalty calculation if after you sold the home and placed the funds into a foreign bank account of which you did not report the account.

Unreported Income from a Foreign Rental Property

If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure – subject to any mortgage that is due and owing on the home. The same rule does not apply to streamlined program applications.

I Opened and Closed Accounts Several Bank Accounts

The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application so that the IRS is aware and understands the transfers.

I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?

Yes. There are some people who may have submitted a “Quite Disclosure” because they were unaware of the whole OVDP process or though they could just amend the tax return late and file late FBAR statements.

What is GATCA/CRS?

CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.

What does “Under Examination” mean?

Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are in an audit or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case – and other concepts that can make your head spin – you may still be able to enter the program depending on what stage of inquiry you received from the IRS.

Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?

No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.

By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.

Streamlined Program FAQ

The streamlined program is an alternative for individuals who were non-willful. The parameters of the program are different, with less reporting requirements, less financial exposure, and less protection. It is important to keep in mind that the program is relatively new but if you were not willful then you do not require criminal protection and therefore submitting to OVDP could be considered “overkill”

Do I Receive Criminal Protection?

No. The reason is that people enter the streamlined program because they were non-willful. That means that they did not intentionally attempt to avoid paying US tax or reporting the accounts – they simply did not know of the requirement. This is common for individuals who were merely earning passive income on a foreign account in the country they previously worked in or resided in, are new to the United States, or their only foreign accounts are from an inheritance.

What is Non-Willful?

There is no definition of the term non-willful beyond the fact that it is a totality of the circumstances application in which the government will look at all of the factors and determine whether they agree that the person was not willful.

What if my Application is Rejected?

If your application is rejected, you would not be accepted into the program and probably subject to an IRS audit. This also means that you have now disclosed all of your financial information to the IRS (there is no pre-clearance for the streamlined program).

*This is another reason why it is absolutely crucial to have an experienced OVDP/Streamlined Program Lawyer. Even if you are rejected form the program, if you have competent counsel you should be able to fight the issue and work to avoid more serious penalties.

My CPA/Accountant/Attorney told me I was low risk

There is no way to know what your risk level is. By that, we mean that at any time the Internal Revenue Service may get wind of information regarding your case, whether it be from a Foreign Bank, FATCA reporting, Former Spouse, Jealous Lover, Angry Business Partner, etc…Trust us, we have seen it before on many occasions.

We hope this helps give you a better understanding of OVDP and the Streamlined Programs. The following is a summary of the difference between OVDP and the Streamlined Program.

OVDP vs. Streamlined

At Golding & Golding we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRSStreamlined Program applications for individuals and businesses around the globe. Click Here to learn about some of our more recent OVDP and Streamlined accomplishments.

In order to assist you better understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:

If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program, and what the definition of “Willful” is.

Whether or not you enter Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. Not two tax situations are identical, and the failure to properly submit to the correct program can have serious consequences for the unsuspecting taxpayer.

Why Comply with IRS Foreign Disclosure Laws?

Because if you fail to comply with FATCA (Foreign Account Tax Compliance Act) as well as general IRS Foreign Disclosure Laws, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as:

Collect Taxes for prior tax years

Collect Interest on outstanding tax liability for prior years

Penalize you for the failure to report foreign accounts on the tax return (Schedule B and 8938)

Penalize you for the failure to report foreign gifts (3520)

Penalize you for the failure to report foreign Trusts (3520 and 3520A)

Penalize you for the failure to report ownership in Foreign Corporations (5471 and 5472)

The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA) with the United States. These agreements are reciprocity agreements, which means that not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.

Why Enter either OVDP or the Modified Streamlined Program?

There are the only two approved programs by the Internal Revenue Service that can bring a taxpayer into compliance. Instead of entering the programs, a taxpayer may qualify to directly report under the reasonable cause exception, in which the taxpayer directly submits the forms with a statement explaining why they were not properly filed instead of paying a penalty.

*The IRS is not known to be sympathetic, and if the IRS does not believe you and audits you and/or you are under examination, you are disqualified from entering either the OVDP or Streamlined Program AND the IRS is now informed regarding all of your undisclosed accounts.

**If the taxpayer submits the forms to the IRS without submitting to the IRS Disclosure Programs, it can be considered “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, he IRS will penalize you heavily as well as consider initiating criminal proceedings against you. In this scenario, not only will the IRS seek to take all of your money and assets through the implementation of penalties and levies, but you may be spending the next 2 to 20 years in prison for tax evasion or tax fraud.

What is the Difference between OVDP and the Streamlined Program?

Before making a decision regarding voluntary disclosure, it is important to understand the difference between the two main programs.

OVDP (Offshore Voluntary Disclosure Program Requirements)

In accordance with OVDP filing requirements, The Applicant will then be required to pay the outstanding tax, along with estimated interest, a 20% penalty on the outstanding tax, as well as an “FBAR” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (Accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe, and remember that by entering the program the applicant is seeking to avoid CRIMINAL PROSECUTION!

When it comes to the Streamlined Program, the penalty is limited to 5% on the highest “year-end” balance for the last 6-years. The reason is that if the person was non-willful, they should not be overly-penalized if there was an artificial increase in the value of the bank accounts – such as from the sale of a home during the tax year.

(A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)

OVDP is Unfair for Non-Willful Taxpayers

Before the implementation of the modified streamlined program, it was difficult for individuals who were non-willful (no specific definition, but generally without intent to deceive or defraud) to become compliant. Why? Because if you are non-willful, you still had to go through the filing procedures as if you were willful, and then opt out of the penalty structure and open yourself up for audit.

Not such a big deal, except for the fact that you also had to pay 20% penalty on the outstanding taxes that you owed along with a 27.5% penalty on the highest year’s annual aggregate (unless you successfully “opted out” from the penalty structure – which came with a whole other set of headaches). As you can imagine, for individuals who simply inherited some money overseas, had no international dealings, and had no idea that they were required to report foreign passive income (Interest income) in a country that does not tax its own citizens on passive income earnings — providing this information to the IRS was a huge burden.

What is the Modified Streamlined Program?

In order to avoid “non-willful” applicants from having to go through the entire OVDP process before opting out, the IRS and Department of the Treasury modified a small program in existence, called the streamlined program, which was very limited. The IRS expanded the program to basically allow anyone who was non-willful to enter the program.

The program reduced the amount of documentation that applicants were required to file to only three years of amended tax returns and six years of FBAR (Foreign Account Reporting Statements). In addition, there was no penalty on the tax amount that was due and no penalty on the value of income generating foreign real estate that was not previously disclosed. Moreover, the 27.5% penalty was reduced down to 5%, or completely waived if the foreign residence requirements were met.

Penalty Waiver: there is a small facet of the modified streamlined program called the Modified Foreign Offshore Program. If a person qualifies for the modified stream of program (which means they acted non willfully) and they can prove they lived overseas for a total of 330 days out of the tax year in any year within the last three years, then they may qualify to have the penalty waived.

The Streamlined Programs sounds great, right? Well it is, unless you are attempting to wrongfully evade the 27.5% penalty by entering the program when you knew you were willful.

What if you are caught trying to sneak into the Streamlined Program?

I cannot stress to you enough to not try and enter the Streamlined Program if you were willful. If you knowingly enter the streamlined program and it is found that you acted willfully in your failure to disclose and report your overseas and foreign assets and income you will most likely be prosecuted by the IRS.

The IRS made this fact known in a recent public relations statement. From the IRS’ perspective, if you wrongfully enter this program in order to avoid paying the full penalty amount what you have done is stolen 27.5% or 50% of the penalty amount due to the IRS – and this does not make the IRS very happy.

Even worse is that you may be subject to criminal prosecution. And, since you have already disclosed all the foreign financial information in your Streamlined Program application, you will be in a tough position to try and defend yourself.

Why is the Modified Streamlined program in Jeopardy?

Just like in everything in life, a few bad apples spoil the whole bunch. The IRS has learned that several individuals who were willful in their failure to report undisclosed foreign tax and bank information have been caught trying to sneak into the modified streamlined program in order to pay a reduced penalty – or avoid the penalty altogether This contradicts the IRS’ intention which was to modify and expand the Streamlined Offshore Disclosure Program to assist taxpayers who otherwise would be overburdened by having to enter the OVDP and opt out of the penalty structure.

There is No Reason to be Scared of the OVDP or the Streamlined Programs

The goal of this article is not to scare you. Rather, it is to warn you to just be cautious if you are entering into these programs. Way too many inexperienced and unscrupulous attorneys, CPAs and enrolled agents see these programs as a way to scare individuals.

If You are going to enter a Foreign Disclosure Program, use an Attorney

While CPAs and enrolled agents (who are not also attorneys) may charge less than an attorney is important to note that you do not have an attorney client privilege with CPAs and enrolled agents. What that means, is that if it turns out you wrongfully entered the streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no privilege between a CPA and Taxpayer when a Criminal Matter is at issue.

OVDP & STREAMLINED SUCCESS!

- Successfully Represented Highly Compensated Earners in a Streamlined Program Disclosure with more than 175 Accounts.

- Successfully represented a non-willful client through the Streamlined Program, even though he had multiple accounts at "Bad Banks" including accounts in a Tax Haven jurisdiction.

- Successfully received notification from the IRS of no penalties being issued against a high-income earning family with more than 20+ foreign accounts worldwide, including India and Canada. Based on their specific facts and circumstances, we were able to submit them using the Reasonable Cause option.

- Successfully completed a multi-person comprehensive disclosure matter for a family with submissions involving both Offshore Disclosure and Reasonable Cause applications.

- Acceptance of a Streamlined Domestic Offshore Disclosure Program submission for a client with multiple accounts, which had several U.S. Taxpayer signatories and more than $1,000,000 of funds in Costa Rica, and secured a full-penalty waiver.

- We successfully represented high-net-worth international taxpayers after their CPA fumbled an audit which left taxpayers with nearly $1,000,000 in penalties, and secured both spouses’ acceptance into the IRS Domestic Offshore Streamlined Program.